SMB’s Options Training Program Presents: The Heart Friendly Butterfly

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Hypothetical Trades Disclaimer Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.”

TRADING THE HEART FRIENDLY BUTTERLY IN EXTREME MARKET MOVES PART 3 TRADING THE HEART FRIENDLY BUTTERLY IN EXTREME MARKET MOVES

Extreme market moves The Heart Friendly Butterfly trade is robust and has been adapted to respond to many kinds of market conditions. Extremely hard moves in either direction in the market, however, will normally cause a maximum loss with most positive theta strategies and this strategy is no exception. The strategy, nonetheless is built to “fight the good fight” with strong directional moves and can survive and even prosper, under such conditions.

June, 2010 Trade

Hard, immediate sell-off…..

…causes immediate downside adjustment

Iron condor structure

Put side credit spread rolled 25 points

Creating a Wider Condor

Plenty of further downside created through the condor roll

Another sharp move downwards

Trade now returns to iron butterfly structure

New Iron Butterfly has wider wings

Profit Target Reached

50% of peak profitability 7 days before expiration

Extreme months Depending on many factors, extreme months can be very profitable or constitute a maximum loss situation. This was an example of the former. The previous month, which included the flash crash of May, 2010, in fact, was a loss which exceeded the maximum loss due to the speed of the market during the flash crash—16%. This was an example of a month in which the market sold off, fairly quickly, more than 8% and the trade had an outstanding result—17% on planned capital.

Market Neutral Trading Strategies Very often, after extreme moves and losses such as those which occurred during the Flash Crash, the options market, due to high volatility and fear, presents excellent opportunities for strong results in the FOLLOWING month. This is a numbers game and thus it is very important to………….

Get Back On the Horse

You WILL have losing months with ANY market neutral options strategy If you can not emotionally accept that, then you should probably not be trading at all, but you certainly should not trade market neutral options strategies. This form of trading requires steadily returning to market each month where the market conditions permit entry, regardless of the outcome of the previous month.